MARKET CONDUCT IN THE U.S.
READY-TO-EAT CEREAL INDUSTRY

PRELIMINARY DRAFT

Jeffrey J. Reimer

University of Wisconsin
Dept. of Agricultural and Applied Economics
Food System Research Group
Madison, WI

John M. Connor

Purdue University
Dept. of Agricultural Economics
West Lafayette, IN 47907-1145
jconnor@purdue.edu

The “Big Three” case against top breakfast cereal makers was the focus of U.S. antitrust activity during the 1970s, but scrutiny of the industry ended abruptly after the case was dismissed in 1981. About this time the prices of breakfast cereals began a steep rise relative to other food products. Using a differentiated-products Bertrand oligopoly framework and data from Selling Area Markets, Inc. (SAMI), the extent and type of market power exercised during the case, and then after the case, is investigated. Between these periods average price-cost margins rose from 38.0% to 41.5%. In both periods the exercise of market power was primarily related to product differentiation (unilateral market power) and the fact that firms manage multiple brands (the portfolio effect). The rise in margins between the two periods, however, was driven by an increase in coordinated market power, which lends support to the original FTC case.